September 4, 2009

The price of the Government

The marginal cost of public funds is the ratio between the social marginal value of public income and the social marginal value of private income. Tax distortions do not increase the marginal cost of public funds. They originate from the social desire to redistribute income.

The marginal excess burden is the social price of more equality. The marginal cost of public funds for non-redistribution spending equals unity. The cost-benefit criterion is sufficient to evaluate public investment projects.

Social cost-benefit analysis for public goods or environmental policy rules should not be adjusted for the marginal cost of funds, but should take into account second-best interactions with labour supply and distributional effects of public policies.

Debt-policy (tax smoothing) cannot be justified on the basis of tax distortions. Revenue-raising instruments are not preferred over regulation for the realisation of allocative objectives.

This publication is in Dutch.


Bas Jacobs
Ruud de Mooij
Alex Armstrong